So… when the Pension Schemes Act 2021 became law and put pension funding, investment strategy and accounting for climate risk firmly within the legislative framework, I became quite excited but first, the main provisions of the act.
The Pension Schemes Act 2021 - overall main provisions.
- Paves the way for the creation of a Collective Money Purchase Scheme providing an alternative or additional choice for employers in the way they offer pension benefits to employees.
- The act intends to strengthen the powers of The Pensions Regulator ( TPR) in order to further protect members’ interests in their defined benefit ( final salary ) pension scheme. There will be three new criminal offences, a new power to issue cicada penalties of upto £1million alongside the strengthening of the regime for contribution notices, enhancing corporate transaction oversight and extended information gathering powers. All of which demand that employers and trustees are aware and report on corporate activities that could have a detriment on their pension schemes and to individually attend an interview if needs be. The Act also gives TPR the power to recover any losses caused by the employer to their final salary scheme.
- The creation of a legislative framework to develop a pensions dashboard, a digital interface to allow pension savers to see all their pension savings in one place to help make better decisions about their retirement income and retirement plans.
- And finally we get to the section relating to “further provisions” amongst the clauses; to ratify the role of the Pension Protection Fund, to protect pension scheme members and help trustees to protect them from scams and transfers into fraudulent schemes and the two pivotal clauses 123 and 124.
Clause 123 - introduces amendments to the provisions of part 3 of the Pension Act 2004 with a “new requirement for schemes to have a funding and investment strategy for providing pension benefits over the longer term and to report on its implementation to the Pensions Regulator in a new statement of strategy”. Hirst et al - The Pensions Bill 2019 - 2020 Parliamentary Briefing
Clause 124 - “would require occupational pension schemes to manage the effects of climate change as a financial risk and to report on how they have done so”. Hirst et al - The Pensions Bill 2019 - 2020 Parliamentary Briefing
Clause 124 made me very excited, but then I started to wonder how practical it will be to implement and what support would be given to trustees of pension schemes to understand and comply with the content of the clause, albeit quite a brief one. And then I marvelled at how in quite a short space of time, challenging the risk of climate change, which has been prominent since……..is now a broad church of green campaigners, activists and financial analysts.
Climate change campaigners have long since made the link that investment provides capital to support a company’s business activities and if these cause harm to the environment and increases global warming, immediate divestment from these companies, rather than a slow transition away, is called for. This was promoted to the top of the agenda once more, with the recent campaigns of Greta Thunberg and Extinction Rebellion, particularly in reference to the fossil fuel companies and companies with high reliance on burning fossil fuels for energy or transportation.
The banking and investment sector have woken up and are joining the dots, perhaps not from the same ethical viewpoint as divestment campaigners but because they now see a very real risk of asset prices falling as a result of climate change. Furthermore, as capital flows are redirected into a greener, renewable, sustainable and circular economy there is the added risk of some companies becoming “stranded assets” with little or no market value. This will also impact on companies who are unable to adapt and move away from their reliance on fossil fuels for their transportation, energy, manufacturing , construction needs. All of this would need consideration, analysis and accounting for management of the effects of climate change as a financial risk.
“Climate change poses unprecedented challenges… The increase in the frequency and intensity of extreme weather events could trigger non-linear and irreversible financial losses. In turn, the immediate and system-wide transition required to fight climate change could have far reaching effects potentially affecting every single agent in the economy and every single asset price. François Villeroy de Galhau Governor of the Banque de France. Source: DWP Consultation Paper
Covid -19 has posed a health and an economic emergency, a humanitarian crisis, loss of life, social immobility, supply chain paralysis and increased government intervention. It has brought into focus questions that have been asked about the impact of a rise in the global temperature on communities around the world and the world that we could be retiring into that the pensions are intended for.
Given the current climate emergency it would be more helpful to elevate Clause 124 from the “further provisions section” of the Pension Schemes Act 2021 and given more emphasis and status, with more support for trustees.
In 2019 regulations came into force to make it a fiduciary duty of trustees to recognise and act on the present and long term risks and opportunities of ESG ( environmental, social & governance) issues and opportunities, including climate change to protect the solvency of defined benefit pension schemes and the value of members defined contribution pensions. From 1st October 2019 trustees had to publish their policies on how they managed financially material ESG factors including climate change.
In the UKSIF white paper, (published February 2020) , the pensions minister Guy Opperman is widely quoted, for his support and desire to see trustees take a lead in engaging with Investment managers. Having addressed asset owners as part of London Climate Week in July 2019 the paper quotes him having said,
“ Pensions lawyers say that trustees must abide by the prudent person principle – using the ‘care, skill and diligence’ a prudent person would exercise when investing for someone for whom they feel ‘morally bound to provide’. Let’s consider what prudence means in the scenario of those oil and gas holdings and climate change.
Perhaps some of those trustees think they are being prudent by timing the market perfectly and realigning their portfolios just before valuations tumble. But I don’t see how every trustee is able to do that. [...]
I don’t want to hear any more that ‘climate change is important, but we leave it to our investment managers’; if you leave the room saying that then we have all failed. I want to hear what trustees are doing having reached that recognition. (Opperman, 2019a) “ Source : UKSIF February 2020 - Changing Course
The challenge thus far, has been formulating a standardised methodology for both qualitative and quantitive analysis, in order to make a fair assessment and comparison of any inherent risk that climate change poses to an investment. Work has accelerated in this area after the Paris Climate Agreement, in developing a non - financial reporting methodology and investment managers will need to understand the new investment metrics and utilise these alongside the traditional modern portfolio theories.
Carbon Tracker in conjunction with the Principals for Responsible Investment have developed a project, 2degrees of separation, which includes an online investor toolkit. The Transition Pathway Initiative, a development from the London School of Economics adds to the qualitative analysis with a tool to assess companies’ management of greenhouse gas emissions and monitoring their performance against the targets of the Paris Climate Agreement.
Latterly, the Taskforce for Climate Related Disclosure ( TFCD) , created by the Financial Stability Board, has a key aim of providing data and standardised reporting methodology around the issues of climate change.
“ Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly and may potentially face a rocky transition to a low-carbon economy, with sudden value shifts and destabilizing costs if industries must rapidly adjust to the new landscape.”
Adoption of the TCFD recommendations and methodology for reporting on climate risk now appears to be the standard and in August 2020 the Department for Work and Pensions’ published a consultation paper: “Aligning your pension scheme with the TCFD recommendations” in August 2020. Aimed at trustees, administrators, pension scheme members and any organisation organisation interested in reducing the risk of climate change it is the result of consultation with some industry heavyweights, investment managers, insurance companies, legislators and campaigners.
In September 2020 the 2 degree investment initiative launched their open source software, Transition Monitor, a PACTA climate scenario analysis program that enables investors to align their portfolio with a number of climate scenarios. It has over 30,000 securities and 40,000 companies in its database.
The Pension Schemes Bill was debated for well over a year, the Pensions Schemes Act 2021 contains groundbreaking legislation in particular clause 124 which places a legal requirement on pension trustees to account for and manage climate change.
Whilst it the clause in the Pensions Schemes Act is designed to reduce the financial risk that climate change poses and make pensions more resilient and robust over the longer term, it could also result in a significant shift of capital away from the oil, gas and mining sectors along with other heavy users of carbon. In turn accelerating the transition to a greener, cleaner planet and leaving the fossil fuel companies at risk of becoming “stranded assets” with little market or no market value.
In response to the Pension Schemes Act, Richard Butcher, chair of the PLSA ( Pensions and Lifetime Savings Association ) was quoted by the Professional Pensions Publication, “UK pension schemes manage more than £2trn on behalf of the public. Savers have told us they want us to use the money to make the world a better place. It is consistent with our fiduciary duty that we do so and tell them about the positive impact their savings have made”.
For some the act may not go far enough.
Expert evidence was submitted to Parliament for consideration during the bill’s passage committee, including a paper from Divest Parliament, Social and Environmental Finance, The Carbon Tracker Initiative, Platform the Divest/Invest Campaign, urging a more immediate alignment to the Paris goals before 2030, a lowering of the target to 1.5 degrees or less and highlighting the need for greater transparency by pension funds to list all their holdings both direct and indirect. Their full submission can be read via the link in the footnotes.
One thing that comes to my mind is that the policy makers, legislators and financial regulators are now quasi allies of the activists and campaigners that once occupied the City and Wall Street ten years ago. Perhaps now that we have humanitarian values working with financial values and the development of a regulatory framework for climate risk accountability, there will be an increase divestment from fossil fuels, leaving carbon in the ground, preserving the remainder of the carbon budget and accelerate the transition into a greener, cleaner economy. One that will hopefully protect communities around the world and the planet for future generations and not just asset prices.
The shift in capital flows has already started and I am confident the momentum will continue. It will be a pivotal year that could go down in history, especially as the UK is a leader in this field and host to the COP26 gathering in the autumn this year.
For the shift to accelerate there needs to be :
- Training for trustees, accountants and advisers
- Transparency from pension funds in connection with their direct holdings and for indirect holdings, transparency from fund managers over their holdings.
- Standardised quantitative, qualatative analysis and reporting methods.
- A framework to assess the ESG credentials of a direct or indirect holding
For now I will end with a pensions quote from the Pensions Minister Guy Opperman,
“To conclude, pensions are all about savings for the long term. As an industry we know that if we don’t tackle climate change then the long term future for ourselves and our children will be severely compromised. We need to act” .
Source: https://www.gov.uk/government/consultations/aligning-your-pension-scheme-with-the-tcfd-recommendations/aligning-your-pension-scheme-with-the-tcfd-recommendations-consultation-guidance Accessed February 2021
I’d love to hear your views if you want your money to make a difference, if you are an employer wondering how to take climate risk into account and where to start with a sustainable workplace pension or if you are an individual with pension and ISA investments and are wondering how this effects you, please get in touch and lets get some conversations going.
- Parliament UK, Pension Schemes Act 2021 Sponsored by Baroness Stedman-Scott and Dr Thérèse Coffey Department of Work and Pensions. https://services.parliament.uk/bills/2019-21/pensionschemes.html( Last accessed 15th February 2021 )
- Hirst David, Thurley Djuna, McInnes Roderick - Research Briefing : The Pension Schemes Bill 2019 -2021 https://commonslibrary.parliament.uk/research-briefings/cbp-8693/ Published 20th January 2021
- Department for Work and Pensions - Aligning your Pension Scheme with the TFCD recommendations : Consultation Guidance https://www.gov.uk/government/consultations/aligning-your-pension-scheme-with-the-tcfd-recommendations/aligning-your-pension-scheme-with-the-tcfd-recommendations-consultation-guidance. updated 1st April 2020
- UKSIF White Paper “Changing Course ? How Pensions are approaching climate change and ESG issues following recent UK reforms” Published February 2020 https://uksif.org/wp-content/uploads/2020/03/UKSIF-SIP-Review-Jan-2020-final.pdf
- Professional Pensions Publication - “Most savers unaware of how their pension scheme is tackling climate change”. https://www.professionalpensions.com/news/4027320/most-savers-unaware-pension-scheme-tackling-climate-change published 17th February 2021
Jill Turner is principal adviser at Jill Turner Associates, Holistic Financial Planning and Wealth Management, an appointed representative of Quilter Financial Planning who are regulated by the financial conduct authority. Jill is a finalist in the Money Management Financial Planning Awards 2016 in the Protection Category, a member of the Personal Finance Society, the London Institute of Banking and Finance and a member of the UK Sustainable Investment and Finance Association.
This article is for information and does not constitute advice but for the record the value of investments can go down as well as up and your capital is at risk.